Stock Analysis & Ideas

What’s Behind LegalZoom Stock’s (NASDAQ:LZ) Big Jump Today?

Story Highlights

LegalZoom made a major pre-market jump this morning, adding over 15%. However, half of those gains were soon given back, and there may be future losses to come.

LegalZoom (NASDAQ:LZ), a major provider of legal services and compliance documents, probably shouldn’t see explosive moves in its share price. Still, after leading off with a 15.4% jump in today’s pre-market session, it’s clear LegalZoom did something big, although the stock has given back half of its gains. That something was its earnings report.

LegalZoom posted adjusted earnings of just $0.05 per share, which was a match for TipRanks estimates that called for exactly that number. Revenue, however, did better still. The company posted revenue of $154.4 million. That not only beat estimates calling for $149.9 million but was also up 4% against the same time in 2021. LegalZoom also increased its full-year guidance with its latest earnings report. LZ hiked the figure from between $612 million and $616 million to between $617 million and $619 million.

LegalZoom’s big jump was definitely a surprise, but looking at several other key indicators suggests that these gains might not be sustainable. That’s why I’m bearish on LegalZoom, going forward.

Is LegalZoom Stock a Good Buy Right Now?

Turning to Wall Street, LegalZoom has a Moderate Buy consensus rating. That’s based on three Buys, one Hold, and one Sell assigned in the past three months. The average LegalZoom price target of $14.50 implies 29.8% upside potential. Analyst price targets range from a low of $7 per share to a high of $19 per share.

Currently, LegalZoom has a 2 out of 10 Smart Score on TipRanks. That’s the second-lowest level of “underperform,” suggesting a high likelihood that the company will ultimately do worse than the broader market.

Meanwhile, other key metrics of investor sentiment will offer no help.

For example, the biggest hit for LegalZoom comes from its own insiders. Insider trading at LegalZoom has turned clearly negative. Insiders sold a combined total of $829,600 worth of shares in the last three months. That leaves sentiment at the “Very Negative” level.

About the only good news for LegalZoom lately comes from its earnings report. The company posted an increase of 25% year-over-year in subscriber revenue. This made up for a significant loss in transaction revenue. Transaction revenue this year was $57.6 million, down 14% against last year’s figure of $66.9 million.

Even Partner revenue was down, coming in at $5.5 million against the $7.7 million seen in 2021.

Worse yet, as good as the revenue figures were this time around, they’re still actually down on a sequential basis. The $154.4 million posted this quarter is a significant drop from Q2’s $163.87 million, and it’s only a slight improvement over March 2022’s figure of $154.21 million.

LegalZoom’s Demand Should Remain Fairly Static

A company like LegalZoom’s demand really should be fairly static. Sure, there will always be some differences. People, for example, aren’t likely to start businesses in times when jobs are plentiful, which means business start-up legal paperwork isn’t so much in demand.

The compliance-related items, meanwhile, should have an especially fixed demand. Governments will always demand government-related paperwork, no matter what the prevailing economic conditions look like. If the total number of businesses remains about the same, then there’s little variation there, either.

However, when you look at LegalZoom’s revenue trend and see its insider selling, the picture doesn’t look so bright.

LegalZoom may be in line for some help, though. The company recently acquired Revv, a company that focuses on “document automation and forms templates.” That’s about tailor-made for LegalZoom. It will help LegalZoom diversify its product offerings. Better yet, it should help LegalZoom develop some new operations as well.

Legal services are normally a fairly static demand proposition. However, if large numbers of firms suddenly exit the market, then so too does a large portion of LegalZoom’s customer base. By offering new services to potential and current customers, LegalZoom could insulate itself from some customer losses. In better times, that can mean more revenue per customer.

Conclusion: The Wagon Train Doesn’t Move When the Wagons are Circled

Essentially, right now, LegalZoom looks like it’s getting into a defensive posture. That’s not a bad move, given the macroeconomic circumstances we face today. However, it does preclude a lot of potential for advancement. That’s why I’m bearish on LegalZoom. Right now, it’s going into terrible conditions, like most firms are. 

LegalZoom should be in a good position to wait out the storm. It should also come out the other side ready to take advantage of better conditions. The Revv acquisition can help with that, but buying in right now doesn’t seem like a good plan.

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